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Court of Appeals affirms CCS win on Failed Hedge Fund Case

April 20, 2016

Brian Spitler and Joe Kingma prevailed on behalf of their accountant clients when an array of rich investors sued trying to recover their Ponzi Scheme losses. The trial courts grant of summary judgment was affirmed on March 18,2014.

The case arose when a hedge fund that, for years, operated as a Ponzi Scheme, failed. The principal of the failed fund pleaded guilty to wire fraud and was incarcerated in the federal penitentiary. Two hedge funds that had invested in the failed fund, along with several trusts and wealthy individuals sued the accounting firm for: fraud; breach of fiduciary duty; violation of the Georgia Securities laws; RICO; and breach of contract. The Plaintiffs were represented by a large, prominent, financial and securities law firm. Plaintiffs alleged that the accountants sent them monthly statements which vastly overstated their investment values and were also internally inconsistent. The complaint further alleged that the accountants must have known of the scheme because the accountants knew: that the hedge fund was required to have an annual audit; the fund’s partnership agreement identified the accountants as its auditors; that the fund had never been audited; that investors had sent letters to the accounting firm referring to it as the funds auditors; and that the monthly statements that the accountants sent out for years referred to an annual audit.

The trial courts well-reasoned decision first noted that the monthly bore a clear disclaimer and that it was undisputed that the principal had lied to all the parties to conceal his thefts. The Court then went on to systematically dismember the claims.

The negligent misrepresentation claims failed because the monthly statement’s disclaimers destroyed any claim of reasonable reliance. The accountants were also not liable for the funds offering documents and the accountants themselves never said they were the funds auditors. The plaintiffs failed to show the specific reliance necessary for their “Holder Claims” to prevail under Georgia law. Finally the Plaintiffs failure to exercise due diligence also defeated the negligent misrepresentation claims.

The Court also dismissed the fraud claims because the plaintiffs could not show reasonable reliance or scienter. The claims under the Georgia Securities Acts of 1973 and 2008 failed because there was no evidence the accountants were guilty of “severe recklessness “ and because accountants are not “ Sellers” under the Acts.

The Rico claims failed because there was no evidence that the accountants participated in the Ponzi scheme or that they had any criminal intent. The court found that minor, inadvertent, document destruction was routine and immaterial.

The remainder of the claims were wiped out by the In Pari Delicto Doctrine. The court specifically held that even though the failed fund had innocent shareholders, the adverse interest exception to the In Pari Delicto Doctrine did not apply.

The Court of Appeals adopted the trial courts analysis and findings without publishing an opinion.

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For informational purposes only. Past success does not indicate the likelihood of success in future cases.